MUMBAI, June 29 (Reuters) - The Indian rupee posted its
biggest daily gain in three years on Friday after the government
confirmed it will not impose retroactive taxes on foreign
investors and as global risk asset rallied.

Euro zone leaders agreed on Friday to take emergency action
to bring down Italy's and Spain's spiralling borrowing costs and
to create a single supervisory body for euro zone banks by the
end of this year, a first step towards a European banking union.

The improved global risk environment comes as investors are
growing more hopeful of meaningful policy reforms at home after
Prime Minister Manmohan Singh, a former central bank governor,
took charge of the finance ministry.

The government released draft rules on Thursday and said the
general anti avoidance rules, or GAAR, would not apply
retroactively, a big concern for portfolio investors.

"The INR may outperform as well as India seems to be
backtracking on its plans to retroactively apply new tax rules
that would penalize a major foreign direct investor," said
Dariusz Kowalczyk, senior economist & strategist for Asia
ex-Japan at Credit Agricole.

The rupee settled at 55.6050/6150 as per State Bank of India
data, rising 3.1 percent over its previous
close. It rose 2.7 percent on the week, its biggest weekly gain
in over two and half years.

That marked a turnaround after the rupee tumbled to a record
low of 57.32 against the dollar a week ago.
"I will wait for more clarity on the euro measures. The
dollar/rupee broke a very important support at 56. If it
sustains below that, we can see a further fall," said Abhishek
Goenka, chief executive at India Forex Advisors.

India has been buffeted by various macroeconomic concerns,
primarily the twin fiscal and current account deficits, leaving
it vulnerable to capital outflows at a time of global risk
aversion.

However, with Singh, widely credit with ushering in economic
reforms in India in the 1990s, taking charge of the finance
portfolio, investors are hoping he will push some much awaited
reforms and address concerns on tax issues.

Global risk aversion has also improved. The euro
surged following relief after the statement from European
leaders, raising hopes it could help ease a big recent overhang
in global markets.

In the currency futures market, the most traded
near-month dollar-rupee contracts on the National Stock
Exchange, the United Stock Exchange and the MCX-SX all ended at
56.0550. The total volume was at $4.9 billion.
(Editing by Anand Basu)

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